Research

We evaluate the investment performance of ESG, paying particular attention to recent performance and highlighting the difference between ESG scores that overlap with traditional risk model factors and those that don’t. Our analysis indicates that, in general, increasing exposure to ESG rarely underperforms the market, and often outperforms the market, especially during the last few years.

Risk Retreated in Q2 But...Active Managers Need to Look Under the Hood

Markets worldwide saw large swings in Q2 2018, and while US stocks were up for the quarter, many world markets were barely in the black. Volatility remained elevated from historical lows, but has eased globally, driven by the fall in market risk. Other components of risk, however, rose in Q2 which may have an important impact on active managers.

In this paper, we show results of stress tests on a number of different Smart Beta ETFs. As we noted in our first paper on this topic, even portfolios with similar investment philosophies (and seemingly identical names) can have quite different exposures. We look at reactions to various types of stresses and show once again how results can differ substantially from one fund to the next. We also show how stress-test results can vary widely over time.

Long-term investors often passively track a strategic asset allocation benchmark whose weights across the various asset classes remains constant over a multi-year horizon (usually 10, 15 years, or longer). Specialist teams, internal or external, may be setup to add an active overlay portfolio in the form of a tactical asset allocation which deviates from the strategic benchmark over shorter time horizons. These programs are used to either de-risk the strategic portfolio in times of market stress, or to add alpha by aligning the portfolio with the economic cycle over shorter time periods (i.e. usually three to five years).

Regulators have strongly endorsed reverse stress testing programs within financial institutions since reverse stress tests can explicitly examine the solvency of a firm. Reverse stress tests are designed to identify economic scenarios that will threaten a firm's survival and potentially help managers hedge against hidden scenarios. These stress tests are attractive from a risk perspective, but implementing a reverse stress testing program that is independent of a manager’s bias is difficult. In this paper, we outline a systematic, quantitative framework to design and construct reverse stress tests. This paper is our third installment on stress testing.

The first five months of 2018 were characterized by dramatic shifts in multi-asset class relationships, with an unusual back and forth of asset prices and correlations, as themes dominating the investment landscape alternated. In this paper, Christoph Schon analyzes how the different correlation regimes present during this time affected the overall volatility and risk decomposition of Axioma’s global multi-asset class model portfolio.

In this paper, Olivier d’Assier evaluates the use of a custom small-cap risk model built for this segment of the Japanese market using the Risk Model Machine (RMM) module in Axioma Portfolio Analytics. Do risk and performance attributions differ from the standard Japan risk model built on the full universe of stocks? What are, if any, the advantages delivered by the custom model for strategies focused on this market segment? Given these results, should small-cap managers include a custom risk model in their investment process?

This paper, written by Olivier d'Assier, Axioma's Head of Applied Research for APAC, focuses on the risk and reward aspect of a risk analysis and how users can incorporate this information in their risk budgeting exercise.

After falling to historically low levels at the end of 2017 volatility surged in the first quarter, driven mainly, but not exclusively by market risk. Against this backdrop, interestingly, style factors remained quite well-behaved.

Since the UK’s decision to leave the European Union, investors have fretted over the impact of Brexit on the UK and European economies. At a high level, the UK and European financial sectors showed large negative returns before the vote and strong positive returns after. Risk peaked around the referendum date, only to decline abruptly afterwards. The question is, what were the main factors impacting this reversal in performance in each region and what were the contributors that led to the rise and decline in risk?